8/19/2007
Been there, done that, will do it again
Billions of dollars were wiped out of the stock market in recent weeks by the sub prime loan collapse in the US. Though far away, we were not spared. What then is this sub prime loan and can we learn anything from it?
The gist of this mess is 'clever' financing and refinancing. Lending to high risk debtors to buy properties and repackaged the high risk loans into something else thinking that the risk will go away. This is the American version of loan shark financing, except more glitzy and sophisticated. But when interest rate soared and the bad debtors defaulted or cannot afford to pay, the house of cards collapsed.
It all started by not only selling properties. The housing agents, property developers and their collaborators, all joined in to paint a glory picture of a property boom. Prices were raised higher and higher or chased up. Analysts and reporters, maybe even paid, wrote about the euphoria as if it will never end. And during a time of low interest rate, buyers were roped into the mad rush as if they would miss out if they did not buy then. There was the fear of missing out, the greed of making money in a property boom, the selfish manipulation of property developers and their accomplices, the media, helped to shore up the whole industry. Sounds familiar? Were the regulators involved as well?
The funny thing about this is that we have been through it and beaten very badly only 10 years ago. And we are going through the whole process again, driving up property prices, writing about how high the prices will go and how big is the liquidity that will absorb all the properties, that it is a sellers market. And we add in the foreign buyers into the pot, plus the en bloc phenomenon, all add in to the fury of a property boom and bubble.
Why are we allowing this bubble to grow only to see it go bust? Why are we so irresponsible?
There are really two kinds of property buyers. The very rich, including the speculators, buying and selling for profit. The next is the genuine property owners, the Singaporeans who need a roof over their heads. This group can only afford what their income dictates. Property prices that shot beyond their income will always be out of reach to them. And if those who have vested interest in high property prices continue to fan and allow the prices to shoot to the sky, the genuine buyers will be the one to lose out.
Because of the limited income of the lower income group, maybe 70 or 80% of the population, they just cannot participate in the private property market. This sector can only be supported by the rich and foreign money. Maybe we should bring more foreigners to buy up all the private properties.
Will we be digging our own grave?
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7 comments:
if they were concerned abt local affordablity they wud have intervened long ago at the risks of getting less gst, duties and property taxes, does this make sense?
the chief salesman for singapore's property buzz always appear in the media talking abt the next big thing in property trends.
his message is simple, to talk up the property mkt and get everybody super bullish, and he owns huge landbanks and developments.
> What then is this sub prime loan and can we learn anything from it? <
Yes.
1 You cannot buy stuff you can't afford, and expect a "happy ending" — i.e. if you are too poor to afford a house, no amount of "creative financing" will get you a sustainable loan to buy a house. You need to first get out of poverty.
2 You can't increase your wealth by simply increasing the amount of money in the system.
3 Artificially LOWERING of interest rates causes people to act in CONTRADICTORY ways:
i) Interest is (artificially) low, therefore people save LESS, spend more and borrow (consumer credit) more
ii) Interest is (artificially) low, therefore firms borrow and INVEST more into capital goods, and things like EXPANDING the business — building more factories, outlets, buying out other businesses, acquiring assets... all because the can borrow CHEAP in a climate of artificially low interest rates.
So what happens is that you get FIGHT between the users of consumer credit, spending on consumer goods and the folks who are investing — all DEMAND MONEY for "opposite" purposes, WHY? because interest is artificially LOW.
In a "hard money" world, the amount available for investment can only come from SAVINGS, which means one has to CUT BACK on consumer credit and consumer goods. The more money people save, the lower the interest rate. The more they spend on consumption, the HIGHER the interest rate.
However if the state can PRINT MONEY, this natural mechanism is short-circuited—the "low interest" sends false signals to market participants—both consumers and producers.
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In redbeans world, the market is driven by greed, euphoria, exaggeration, etc.
However, this is simply human nature—people being people. The real poison is the ability to inflate and deflate the money supply—all by power of the state.
People can speculate, comment, entice, deride and behave in their greedy ways, but their choices of behaviour is strictly CURTAILED under a hard money system. In other words, they can be themselves, but they won't be able to wreck the economy.
Having the ability to remover the NATURAL CONSTRAINTS of limited supply, sends a signal to the market that money will never run out. Do as you will with it: spend as much as you want, borrow as much as you want.
No wonder there is never a happy ending. Paper money = wealth erosion. Just watch.
When people try to justify recent property boom, they use
1) coming casino. they claimed that casino will bring in more rich foreigner for luxury properties. More rich gambler perhaps. But will they buy up properties in Singapore ?
2) F1 racing. I am really puzzle with this claim. F1 will attract visitors once per year. But why it has anything to do with the property market? Sepang area near KL, where the F1 held for past few years, remain quiet and did not see any boom in their property market.
3) Current shortage in supply. This sounds logical, but how true is it ? Shortage of supply should mean more demands and transactions, as more and more people rush out to buy a property. From HDB resale data, it is hardly see any dramatically increase in sales volume. Put it simple, price increase without dramatic improve in volume can be technically said as unsustainable.
The US Fed just pumped more liquidity into the global financial system to "ease" the credit crisis.
The credit crunch was caused precisely by too much money, created by credit chasing too few goods—especially property and stocks—driving up these "values" to unsustainable levels.
We've had a "correction" over the last few weeks—good, Nature's Laws are working. No one should intervene—allow Nature to do its work and "clean out" the system. There'll be some collapses—this is unavoidable. Then in a year or two things will return to "normal"—where production, consumption, savings and investment all re-align to more or less sustainable levels.
Increasing the money supply now will prolong the pain, make it worse and introduce more uncertainty and instability to the system.
The next crash will be worse. This is what the central bank of Japan did after the Tokyo crash in late 80's-90's, and threw Japan into long recession.
temp liquidity is needed to ease the short term crunch caused by the folding of funds and collapse of financial inst.
That;s my point: those institutions who made unsustainable loans—mostly to people almost guaranteed to default—need to FAIL and go out of business.
That is the main purpose of techinical corrections: to kill off the shit.
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